Tuesday, April 30, 2013

A 2012 paper entitled "Demographic Challenges and Opportunities for U.S. Housing
Markets" by the Bipartisan Policy Centre examines how growth in
the number of seniors in the United States (and, for that matter, any developed
nation with a large cohort of Baby Boomers) and how it will impact housing
particularly as these Americans retire and dissolve their households.

Let's open with a couple of
definitions. Baby Boomers are generally considered to have been born
between the years of 1946 and 1964 and it is estimated that in that time
period, approximately 76.4 million Baby Boomers were born, making up nearly 40
percent of the total population. Echo Boomers are the children born to
Baby Boomers between the years of 1981 and 1995; there are an estimated 65
million children in this age group. Since fertility rates dropped over
the 50 year period between 1946 and 1995, Baby Boomers generally had fewer
children than their parents as shown here:

During the period of the baby boom,
women were having between 3 and 3.7 children each; this fell to between 1.7 and
2.1 during the period between 1981 and 1995. Please note that while the
76.4 million number is commonly used as the total number of Baby Boomers born
in the United States, the census in 2000 counted 79.6 million United States residents born
between 1946 and 1964 with the larger number accounting for the inflow of
immigrants.

Between 2000 and 2010, the number of
Americans over the age of 65 increased by about 5 million. Over the next
20 years, it is estimated that the population of Americans over the age of 65
will increase by over 30 million with an increase of 14.2 million by 2020 and
an additional increase of 16.5 million by 2030. This means that senior
Americans will make up 20 percent of the total population, up from 13 percent
today.

How will these tens of millions of
older Americans impact the housing market? As adults enter their sixties,
the level of household dissolution exceeds the level of household creation,
releasing more housing units into the market, particularly over the next forty
years. While many senior Americans currently prefer to remain in
owner-occupied housing, a trend that is likely to continue into the future,
many of the houses that they occupied while they were raising families are
unsuitable simply because they are:

1.) too large (over-housing)

2.) too expensive to adapt for
impaired mobility or

3.) too isolating as they need
increased support from family members.

It is estimated that between 2000
and 2010 (before the influx of Baby Boomers into their senior years) that
people over the age of 55 released over 10.5 million net mainly owner-occupied
housing units to the housing market. During that same time period, 14.7
million new dwelling were built and the number of new households headed by
Americans under the age of 55 grew by 21.8 million. That means, on net,
there was a growth of 11.2 million new households (the difference between the
number of households dissolved and the number of new ones formed).

Looking to the future, economists
estimate that seniors will release between 10.6 and 11.3 million housing units
between 2010 and 2020 and will release an additional 14.4 to 15.0 million units
between 2020 and 2030 with 80 percent of these being owner-occupied housing.

The American housing market will
increasingly rely on Echo Boomers for its salvation; before the year 2020, it
is estimated that Echo Boomers will account for the absorption of between 75
and 80 percent of owner-occupied housing. Unfortunately, it is this very
generation that has suffered from a series of recessions in the new millennium
which has resulted in lowered income and an inability to form new households
and purchase residential real estate. As shown onthis
chart and keeping in mind that today's 24 year olds will have the
potential to form new households within the next decade, the number of
unemployed younger Americans was still at elevated levels in 2012:

On top of that, it is estimated that only 21 percent
of Echo Boomers were married in 2009 with 75 percent being single and never
married. Only 20 percent have children in their homes compared to 30
percent of Baby Boomers when they were at the same stage of life. As noted,
the economy has been particularly hard on Echo Boomers; the median income of 15
to 24 year olds dropped by nine percent between 2009 and 2010 with nearly half
of 25 to 34 year olds who moved in with family and friends to save money living
below the poverty line. Another issue facing Echo Boomers is very high
debt loads associated with student loan and credit card debt.

With all of this in mind, the
authors of the study generated three scenarios that predict the demand that
Echo Boomers will bring to the housing market. Note that these scenarios
each include a constant net immigration rate of 975,000 people per year.
Here are the scenarios:

1.) Low Case: Between 2010 and 2020,
9.7 million new households are generated because of a weak economic recovery
and an inability to attain homeownership. Including people between 15 and
34 years of age plus five years in 2010 brings the total to 15.6 million new
households.

2.) Medium Case: Between 2010 and
2020, 12.3 million new households are generated because of a moderate economy
recovery. This scenario assumes that there are moderate reductions in the
requirements for down payments and that the rate of household formation is
similar to what was seen between 1990 and 2010. Including people between
15 and 34 years plus five years in 2010 brings the total to 18.8 million new
households.

3.) High Case: Between 2010 and
2020, 14.9 million new households are generated because of a strong economic
recovery similar to what was seen in the 1990s. Including people between
15 and 34 years plus five years in 2010 brings the total to 17.1 million new
households over the decade.

Under the same economic assumptions,
the decline in the number of older households over the decade ranges from 11.6
million to 10.6 million, a factor that is less impacted by economic growth rates.

Here is a graph summarizing the
data:

While the number of housing released
by America's newly minted seniors is absorbed by the growing number of newly
minted households in all three cases over the period from 2010 to 2020, the
situation worsens in the decade beyond 2020. Under the low case scenario
(weak economic growth), the number of owner-occupied dwellings released by Baby
Boomers will increase and new owners will only be able to absorb 300,000 more
units that seniors will release on a national scale. This near
national parity means that many local markets will be oversupplied, meaning
that existing Baby Boomer homeowners after 2020 will face some difficult decisions; lowering prices,
conversion to rental housing, leaving them vacant or abandoning them.
Sadly, metropolitan areas with a large future supply of dwellings
released by an aging population are not necessarily those areas which will have
a high future housing demand. Most states now have a relatively even
distribution of Baby Boomers, however, the population distribution of Echo
Boomers (and post 1980 immigrants) is much more uneven. For example, in
Michigan, West Virginia, Ohio, Pennsylvania, Rhode Island, Mississippi and
Louisiana, the number of seniors exiting homeownership is nearly the same as
the number of new households being formed largely because these states had
difficulty retaining and attracting Echo Boomers and immigrants. As
Boomers age, the number of dissolving households in these states is likely to
outstrip the number of new households being formed, putting downward pressure
on the housing market. In contrast, Nevada, Arizona, Utah, Idaho and
Texas have all experienced high birth rates and added a great number of jobs
since the beginning of the new millennium. In these states, the release
of owner-occupied housing added up to less than 35 percent of the increase in
housing supply required to meet the demands of newly formed households.

Obviously, this analysis shows that the formation of new households by the Echo Boomers is key to the future of the United States housing market. If the rather lukewarm economic growth experienced by today's young men and women in combination with an elevated number of working "retirees" prevents them from being able to afford homeownership, as the next two decades pass, we could see the housing market, particularly for some types of housing, suffer from further stress.

5 comments:

Great job here. I really enjoyed what you had to say. Keep going because you definitely bring a new voice to this subject. Not many people would say what you’ve said and still make it interesting and Thanks for this great post.

Baby-Boomers who are selling houses are generally selling larger homes where they had raised families in order to downsize or move closer to family or cities. The buyers interested in those homes are not the Boomer Echo kids as many have not yet gotten married or had kids but Gen X families. They are unmentioned in the article but are in a better position to either buy or buy-up a bigger house than the boomer echo (aka Gen Y).

The other issue with the article is it analyzes the country as a whole. There will be great variation based on job growth from region to region. Places like Seattle will see housing prices rise simply because job growth has pushed unemployment down to near 4% thanks to places like Amazon, Boeing and Costco doing well. Working people need places to live.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.